SHIFTING CABLE-SCAPE COMPLICATES EXPANSION

ATLANTA-Ask cable operators, analysts or brokers about how multiple system operators like E.W. Scripps Co. decide whether to expand or sell their operations and you're likely to get a deep sigh and a two-word answer: "It depends."

It's a complicated analytical process that underscores what a radically different business cable is becoming. The consensus is that providing plain cable TV service will not be enough to survive.

That means serious evaluation of its commitment to cable for any MSO below the size of a Tele-Communications Inc. or Time Warner.

Scripps said late last month that it has begun looking at "strategic options" for its 749,000-subscriber cable TV division, with those possibilities including selling all or some of the systems, forming joint ventures, or expanding.

"People who have good strategic plans will be the ones who succeed," said David Roddy, chief telecommunications economist for Deloitte & Touche. "Overall, you can't just stand still as a cable operator."

But what are the factors that have to be considered in the making of a "good" strategic plan?

The number of subscribers is just the starting point.

"It used to be said that any operator with under a million subscribers couldn't make it," said Bill Fitzgerald, VP of the cable brokerage division for Daniels & Associates in Colorado.

"Today people say the cut-off is 3 million, but who the heck knows? At the end of the day, the bottom line is that some type of regional clustering and market consolidation strategy is critical."

Clusters of systems with dominant market positions are essential for any operator considering getting into telephony, and it also provides for better ad revenue to supplement subscriber cash flow.

And should an operator opt to sell, having a strong market penetration will make those systems more attractive to potential buyers.

Marcus Cable is a case in point about regional clustering strategy.

The Dallas-based cable operator decided in early 1994 that it was time to either expand or sell.

At that time, the company had 145,000 subscribers, with 90,000 in Wisconsin.

"Deciding to expand really relates to the opportunity as to what is available to buy," said Marcus CEO Jeffrey Marcus.

"We were sitting there in early 1994 with the opportunity to become the largest operator in the state of Wisconsin and create a cluster that would be one of the country's best because it's so big."

Marcus bought systems from Star Cablevision Group and Hallmark that quadrupled its Wisconsin holdings to 350,000.

The Sammons acquisition also gave Marcus five clusters of 90,000 or more in the Midwest and Southeast, including the major market of Dallas/Fort Worth.

Last month it moved into the ranks of the top 10 MSOs with the purchase of Sammons Communications' 660,000-subscriber systems.

And while Marcus' operations are now much more far-flung than just Wisconsin-Texas, Alabama, Maryland, Delaware, Illinois and Indiana-Mr. Marcus said these are "outposts for filling in."

He added that in Illinois and Indiana, where the company now has 100,000 subscribers in predominately rural areas, there are a number of independent cable operators who could be likely sellers.

Marcus exemplifies the questions that have to be considered in evaluating an expansion strategy: How possible and how expensive is it to get a dominant market share? Are there competitors who might be willing to sell given the current industry conditions, or are they major operators like TCI or Time Warner who are focused on their own expansions?

Then, too, there is the competition from alternative providers to be considered: For instance, how aggressively is the local regional Bell operating company moving into the video business? And how vulnerable is the market to direct broadcast satellite?

The competitive factor is key because it plays to how much of an investment may be required-marketing, adding channels, improving reception-just to maintain existing market share. Not to mention the system and plant improvements that may be required to deliver telephony.

Once such investments are made, how much of a return can be expected, and how quickly? That's a decidedly murky issue, executives say.

Subscriber revenue isn't expected to be much of a growth area, since cable penetration is already at about 62%.

Looking to telephony as the other major source of revenue is also a question mark because, though local telephone service looks like a juicy market in terms of sheer size and value-around $75 billion nationally-it's only guesswork at this point as to how much of that revenue can be siphoned off to cable phone-service providers in any given market, executives say.

So, say a cable operator looks at all those issues and decides it's best to sell to somebody with a better market position or deeper pockets. But that's not simple, either. Valuation of cable systems is a tricky business right now.

Just plain cable service isn't selling at a premium because subscriber revenue is expected to remain about the same or show only slow growth. And, again, the potential from diversifying into telephony, data services or interactivity has yet to be quantified.

A seller's best bet for a price above 10 or 11 times cash flow is to have a system that could offer market advantage to a major MSO looking to expand its footprint.

"It's an attractive time to sell if you can tell that story successfully," Mr. Roddy said.